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Dallas/Ft. Worth Suburbs Leading Way, While Suburban Markets Hit Hard by Housing Bust are Coming Back Stronger than Earlier in Cycle

With the migration of many millennials to urban environments, some commercial real estate industry observers are less than bullish when it comes to suburban office product. However, the so-called “downfall of the suburban office sector” may be highly exaggerated, according to a new report from CBRE Group, Inc. that shows the U.S. suburban vacancy rate to be near a pre-recession low.

Among the 58 suburban markets tracked by CBRE Research, 50 markets recorded positive absorption in 2016, including 15 with more than 1 million sq. ft. of absorption. The Dallas/Ft. Worth suburbs alone accounted for 13 percent of suburban absorption—the largest share among U.S. suburban markets—and 11 percent of total office absorption among the U.S. metros tracked by CBRE Research. Dallas/Ft. Worth also accounted for 13 percent of U.S. suburban office construction underway as of Q4 2016, the second-largest share behind only San Jose.

“What the primary Dallas suburban submarkets have experienced over the last three to five years is unprecedented in the history of the DFW office market,” said Baron Aldrine, Senior Vice President, CBRE. “The increasing demand, activity, absorption rates, huge corporate relocations and rental rates in the DFW suburban office market have not come close to these levels in years.”

Many markets that have lagged during the current expansion due to particularly severe housing busts, overbuilding or other factors—including multiple Florida markets, Detroit, Milwaukee, Phoenix, Long Island, Inland Empire and Los Angeles—posted year-over-year vacancy rate decreases of 200 bps or more in Q4 2016. The suburban vacancy rate across the U.S. has not increased for 27 consecutive quarters through Q4 2016 and stands at 14.1 percent—450 bps below the cyclical peak of 18.6 percent in Q2 2010. The vacancy rate is now just 20 bps above the previous low of 13.9 percent in Q2 2007. The suburban market has registered positive absorption for 27 consecutive quarters as well, underscoring its consistent improvement since early 2010.

“Since the end of the Great Recession, the U.S. suburban office market has tightened at a steady clip, boosted by improving demand and low overall levels of new supply compared with previous cycles,” said Andrea Cross, Americas head of office research, CBRE. “Still, the suburbs are having a hard time shaking the perception that they’re struggling to keep up with the allure of vibrant downtowns.”

CBRE’s analysis shows the U.S. suburban market strengthening in comparison to downtowns. While the downtown market is still out-performing the suburbs by some metrics, the gap in vacancy is shrinking in many markets across the country; the suburban vacancy rate is still 340 basis points (bps) more than the downtown vacancy rate, but it’s a significant improvement over the long-run average gap of 430 bps since 2000.

“The drivers in the DFW suburban office market are not any different than they were 20 years ago. We still have diverse labor demographics, low cost of living, the DFW airport and a Central time zone,” said Mr. Aldrine. “One of the biggest differences we are seeing now is the key corporate relocations or large regional offices moving to the suburbs which is creating a lot of momentum in the market. Another key differentiator in this cycle is the top notch, live-work-play office developments like Cypress Waters and Legacy West that are attracting these companies to the area.”

“Although suburban office growth is expected to moderate in the next few years, we believe the market still has further room to run. Many suburban markets are positioned for further occupancy and rent gains due to continued demand and lack of available supply, especially newer, high-quality product,” said Ms. Cross.